Answer to Question #113224 in Microeconomics for March

Question

Explain precisely why ‘Opportunity Cost’ is always a RELATIVE concept and is never to be construed in ABSOLUTE terms. In addition, why is the PPF function never strictly convex -what is the economic implication of strict convexity? You are free to provide appropriate examples of your choice.

Answer 1

‘Opportunity Cost’ is always a RELATIVE concept and is never to be construed in ABSOLUTE terms, because it is a relative price of one good or service in terms of other good or service which we have to give up. So, we need just relative number.

PPF function is never strictly convex because there are no fully identical goods in real life which are perfect substitutes.